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What You Need To Know Before Investing In Colony Credit Real Estate, Inc. (NYSE:CLNC)

Simply Wall St

Colony Credit Real Estate, Inc. is a US$1.8b small-cap, real estate investment trust (REIT) based in Los Angeles, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. I’ll take you through some of the key metrics you should use in order to properly assess CLNC.

See our latest analysis for Colony Credit Real Estate

Funds from Operations (FFO) is a higher quality measure of CLNC's earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For CLNC, its FFO of US$101m makes up 31% of its gross profit, which means over a third of its earnings are high-quality and recurring.

NYSE:CLNC Historical Debt, September 14th 2019

CLNC's financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky CLNC is, broadly speaking, to have debt on its books. The metric I'll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 1.8%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take CLNC over 50 years to pay off using just operating income, which is extremely long. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.

I also look at CLNC's interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it's better to use FFO divided by net interest. With an interest coverage ratio of 0.45x, CLNC is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.

In terms of valuing CLNC, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. CLNC's price-to-FFO is 18.37x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.

Next Steps:

In this article, I've taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. Colony Credit Real Estate can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:

  1. Future Outlook: What are well-informed industry analysts predicting for CLNC’s future growth? Take a look at our free research report of analyst consensus for CLNC’s outlook.
  2. Valuation: What is CLNC worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CLNC is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.